Addison can choose eithera safe or a risky project. For as100 investment, a safe project yields $110 with certainty, while a risky project is equally likely to yield $200 or zero. Addison needs financing for s0 out of 100 dollars. Lenders cannot observe his choice of project. Everyone is risk neutral and the cost of funds is 6% Can Addison finance with debt? OA No, because there's no face value that enables both Addison and the lenders to ean, on average, the cost of funds OB No, because debt holders do not tike risk OC Yes but he will choose the risky project OD. Yes, and the outcome is fully efficient Reset Selection

Addison can choose eithera safe or a risky project. For as100 investment, a safe project yields $110 with certainty, while a risky project is equally likely to yield $200 or zero. Addison needs financing for s0 out of 100 dollars. Lenders cannot observe his choice of project. Everyone is risk neutral and the cost of funds is 6% Can Addison finance with debt? OA No, because there's no face value that enables both Addison and the lenders to ean, on average, the cost of funds OB No, because debt holders do not tike risk OC Yes but he will choose the risky project OD. Yes, and the outcome is fully efficient Reset Selection

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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E7.10 (LO 3), AP The local gas station owner, Ralph, is looking to invest in LED lighting displays around his fuel pumps to distinguish his station from the one just down the street. He has received several bids from cred- ible companies, none of whom have worked with Ralph before. He knows this type of investment is needed Determine NPV and profitability index for three options. CHAPTER 7 Capital Budgeting Choices and Decisions to keep his business looking current and trendy, but he is anything but “pumped" about spending this much money on a lighting display. Based on significant research and discussions with friends in the industry, he makes the following esti- mates to go along with each bid. Bid 1 Bid 2 Bid 3 Cost of lighting, installed $80,000 $100,000 $75,000 Additional annual revenues 15,000 17,000 15,000 Additional annual operating costs 1,800 2,500 3,000 The useful life of all three lighting schemes is 15 years, at which point none of them would have any salvage value.…
In an experiment on risk aversion, a group of people were given the following choice: A) Lose $100 with certainty, or B) 50% chance to win $50, 50% chance to lose $200. An overwhelming majority chose option B. This can be best explained by which of the following? Option B has a smaller expected loss than option A. Option B has an expected gain as opposed to certain loss with option A. This behavior violates the Weak Axiom of Revealed Preference. People have a greater aversion to loss than to risk. This behavior is consistent with risk aversion with losses.
Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
2. Suppose you bought a condo for $200,000 financing it with a $40,000 down payment of your own funds and a $160,000 mortgage loan from a bank. D.you only put down $20,000 and borrowed $230,000 to buy the $250,000 house. Assuming that the market value of your house has fallen to $210,000 and ignoring interest and other costs, calculate your rate of return on your asset (ROA) and your rate of return on equity (ROE).
You and another analyst are asked to choose between two projects. Your manager tells you that the opportunity cost of capital is 10%. The other analyst points out that Project B has an IRR of 37.3%, which is much higher than Project A’s IRR of 24.7%, so he thinks Project B is the better project. Do you agree or disagree? Explain your answer. If you disagree with the intern, explain why the other analyst’s logic is incorrect.
2. Consider the model of Moral Hazard where firms choose between investing one unit of output in a less risky or more risky project. The safer project yields with probability and zero otherwise while the risky project yields 2 with probability and zero otherwise i.e. TG = G = TB B = 2. Suppose firms finance their investment by borrowing 1 unit from a the fiinancial market at interest rate R. The financial market is risk neutral and requires an expected rate of return equal to the risk free rate which is assumed to be zero. Will there be an equilibrium with lending to firms from the financial market A. Yes B. No C. Not enough information D. None of A-C
39. Deyland Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. WACC = 9%. Year 0 a. $24.71 b. $27.46 c. $30.51 d. $33.90 e. $37.29 1 2 3 4 CF, -$1,100 $375 $375 $375 $375 CF₂ $2,200 $725 $725 $725 $725
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